New PPF model: How does it affect schemes in the Not-For-Profit sector?

Changes to the PPF levy model should mean lower levies for the vast majority of schemes sponsored by not-for-profit employers, but a minority of around 10-15% are expected to see an increase in their levy.

The Pension Protection Fund (PPF) has published its latest policy statement which sets out how PPF levies will be calculated for the three levy years from 2018/19 to 2020/21, barring a couple of points still to be clarified later this year following a final consultation. A number of changes have been made to the previous model and these were originally set out in a consultation issued by the PPF in March 2017. For Not-For-Profit (NFP) schemes, the model changes are broadly as set out in that consultation.

The PPF is an arrangement that pays compensation to members of ‘defined benefit’ (DB) pension schemes whose employer has failed leaving behind a scheme with a substantial deficit. The PPF is financed by a ‘levy’ payable by all eligible DB schemes, with the levy dependent on each scheme’s funding position, investment strategy and sponsor failure risk.

However, there will a minority of around 10-15% where the changes will cause higher levies, typically schemes with weaker employers.

Analysis by the PPF shows that (all else being equal), around 80% of schemes with sponsoring employers that the PPF classify as being in the NFP sector should see lower PPF levies following the proposed changes. However, there will a minority of around 10-15% where the changes will cause higher levies, typically schemes with weaker employers.

Care is needed in assessing whether the changes will be positive or negative for individual NFP schemes. In particular, there have been a number of changes to the model which is used to calculate the sponsor’s probability of insolvency, which is one of the key factors that affects the size of the levy payable. The changes mean that the average NFP sponsor will have a higher failure risk than under the previous model, which in isolation would lead to a higher levy, but for the majority of schemes this has been more than offset by other changes to the model, hence the lower expected levies.

We would suggest that schemes in the NFP sector obtain details of their sponsor’s insolvency risk score under the new model and, for those with less favourable scores, get an estimate of the 2018/19 levy to assess the potential impact. If you are concerned about the potential impact or would like some assistance we would be happy to help.